SPEAKING at a forum for finance managers held in Nicosia yesterday, senior managers from three of the Island’s banks outlined a gloomy future for the economy and called on government to take bolder steps to reverse the downward course.
Christos Stylianides, deputy CEO of the Marfin Laiki Bank said that “The Cyprus banking system dealt with the shocks of the global credit crisis. However, the government’s failure to take measures in time led to its consecutive downgrades by the rating firms and its inability to borrow from the foreign markets”.
“On the other hand banks are under constant pressures to increase their capital due to the haircut on Greek bonds, so we were forced to stop lending”, he added.
Mr Stylianides said that the liquidity problem in Cyprus is due to the policy pursued by the Cyprus government and especially the policy of the former Finance Minister, who tried to finance the deficits through domestic borrowing, which exacerbated the banks’ liquidity problem.
A further reason is the downgrading of the banks by the ratings agencies, which affects the inflow of deposits.
Marios Savvides, General Manager of the Piraeus Bank stressed there is cash but there is no liquidity in the market and although balance sheets show that cash is available, it is not available for lending.
He also agreed with Mr Stylianides that lending by the banks will be very restricted next year.
Mr Savvides also believes that property prices will continue to fall over the next six months.
Comment
Various reports indicate that the average Cypriot’s take home pay is around €20,000/annum, while the latest RICS Cyprus Property Price Index shows that the average price of a 3-bedroom, semi-detached house is €419,880; that is nearly 21 times the average Cypriot’s annual salary!
Compare this to the UK, where the average house price is around 6 times the average salary.
This would indicate that the property market in Cyprus has been manufactured as the average Cypriot cannot afford to buy a house without borrowing many times more than their annual salary.
In the past, banks were giving credit based on their expectations that the value of the underlying collateral (property) would continue to increase and this helped to fuel the boom in house sales.
But now that property prices have fallen, the underlying collateral is worth less – and in some cases it has fallen below the amount of money advanced under a mortgage. As the banks have been tightening their criteria for lending, this puts further downward pressure on property prices because their value depends on the willingness of the banks to lend.
How much further will property prices fall? Only time will tell.
@Nigel
Thanks for the clarification. This suggests that the methodology might indeed be good. The problem would appear to lie in the selection of the “notional/hypothetical semi used to calculate the Index”. The RICS Cyprus Property Price Index has chosen a well-located, superior 3-bed semi and has arrived at an average price for a well-located, superior semi. This, however, does not result in a genuine average price for a typical 3-bed semi in Cyprus, as a genuine average would incorporate all 3-bed semis.
I suspect that Halifax and Nationwide, in order to avoid distorting their conclusions, have not chosen such a superlative property as their ‘standard’.
@Frank – I don’t think I explained things very well.
The average price is the average price of a notional/hypothetical semi used to calculate the Index.
This is the same technique that is used by the Halifax and Nationwide in the UK. They both use use a “standard” house for their Index calculations.
@Nigel
250m2 may, as you say, not be an unreasonable size for Cyprus: yet I still dispute that it is average. All those small houses which you describe as being for the British market should have a downward effect on the national average size of a 3-bed semi (and consequently, the price). I know plenty of Cypriots but very few (in fact, none) of them have a house as large as 250m2. I seriously doubt that 250m2 is a true average or median size for a 3-bed semi: just as I doubt that €419,880 is an average or median price for a 3-bed semi. Nor do I accept that it is right to quote the price of a “250m2 on a decent sized plot of land” in “good residential areas” as the average price, when such a house is clearly neither average nor median.
As many 3-bed semis in Cyprus are less than “250m2 on a decent sized plot of land” and are not located in “good residential areas”, they must drag the average down: meaning that the “250m2 on a decent sized plot of land” in a “good residential areas” should command very considerably more than €419,880. Every 3-bed semi which sells for less means that the better houses must sell for more.
I still believe that to reach the conclusion that the average price of a 3-bed semi in Cyprus is €419,880 means that either the methodology is flawed or the implementation is incompetent (or deliberately distorted).
@Frank – New build houses in the UK are the smallest in Europe; their average size is a mere 76 sqm according to a BBC report a couple of years ago.
(In comparison, the average new build house size in Australia is 206sqm).
This is one of the reasons why there are so many empty newly built houses in Cyprus at the moment because they were designed and built for the British market. No-one else is showing much interest in them apart from perhaps Cypriots looking for a weekend home.
I have a pair of un-matched semis next to me one of which is 450 square metres and the pair are set on an 800 square metre plot (the same as my bungalow).
I would agree that houses are being built smaller these days, but 250sqm for a semi is not unreasonable for Cyprus.
@Nigel
Are we then saying that €419,880 is the average price of a 3-bed semi; when such a semi is very far removed from being an average semi?
Is there any validity in quoting an average price for a 3-bed semi which is “250m2 on a decent sized plot of land” when such a semi is quite exceptional and far exceeds the aspirations of the ‘average’ buyer?
It is misleading to use, “hypothetical properties” as the basis for the average price. The average 3-bed semi in Cyprus is not “250m2 on a decent sized plot of land”; nor is it in “good residential areas”. It is average size in an average area.
Does anyone know the real median price paid for all 3-bed semis which have been sold during the relevant period? That seems most unlikely as the authorities claim that buyers and sellers frequently (and fraudulently) under-declare the true price paid for property. The quoted €419,880 might represent the under-declared average price of these hypothetical 3-bed semis. Then again it just might be utterly misleading.
@Frank – you should not confuse the hypothetical properties used to calculate the RICS Cyprus Property Price Index with those built for and targeted at the overseas market.
The semis referred to in the Index are 250m2 on a decent sized plot of land and if you check on the estate agents’ websites you will find that Index prices are not unreasonable.
We know that holiday and small homes have fallen in value much more than residential properties in good residential areas – this isn’t surprising as they were significantly overpriced in the first place.
Interesting chart in this article re the sovereign debt ratings:
Now UK faces a £5bn bill to bail out Spain… as ministers plan for euro collapse
I think the € 419,880 must be the average figure that Land Registry use when they “assess” the value of a 3 bed semi, before they impose their taxes. If this figure is anywhere near correct then it is no wonder that sales of new properties have fallen through the floor.
@ Frank
Maybe its the figure the developers give to the banks? One local developer to our home is showing his 3 bed houses at nearly half million euros, and he has seven, none sold but that’s a lot of capital if he’s challenged.
€419,880 for a 3-bed semi! This must be on a parallel universe, as I have not seen any prices which remotely approach such a figure. Is this another illusory figure derived via the University of Reading methodology? If so, I suggest that the authors of that methodology should all go back to infants school and learn their ‘times tables’.
If we could place any trust whatsoever in the quoted figures, it’s good news for property owners (at last) as: ‘This time next year, Rodney, we’ll be millionaires’.
My own methodology is that houses are worth what you can sell them for.
Unfortunate but very real, this is not just a domestic situation, the property and liquidity problems are mirrored throughout Europe and indeed beyond. Cheap money, greed and ignorance by all concerned, governments, banks, developers, agents, valuers, lawyers, joe public and the rest has caused this mess and judging by moves afoot in the EU core group a solution to this dilemma will be a long way off. The price growth 06/07/08 was never sustainable, in my opinion a reality check is needed and the over inflated prices need to be addressed, a lot of people will be hurt but reality rules.